Curated by: Rubric Advisors
Equity Compensation
Section 83(i) Elections: Deferring RSU Tax at IPO
Section 83(i) lets eligible employees defer income tax on RSU settlement for up to five years after an IPO, if strict requirements are met.
Section 83(i) Elections: Deferring RSU Tax at IPO
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What Section 83(i) Actually Is
- Section 83(i) allows qualified employees to defer the income tax owed when RSUs vest and settle at the time of an IPO
- Without this election, RSU settlement triggers ordinary income tax on the full fair market value of the shares received
- The deferral can last up to five years, giving employees time to sell shares and generate the cash needed to pay the tax
- Created by the 2017 Tax Cuts and Jobs Act for rank-and-file employees at newly public companies
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Full Guide
What Section 83(i) Actually Is
- Section 83(i) allows qualified employees to defer the income tax owed when RSUs vest and settle at the time of an IPO
- Without this election, RSU settlement triggers ordinary income tax on the full fair market value of the shares received
- The deferral can last up to five years, giving employees time to sell shares and generate the cash needed to pay the tax
- Created by the 2017 Tax Cuts and Jobs Act for rank-and-file employees at newly public companies
Eligibility Requirements Are Strict
- The company must grant equity to at least 80% of its U.S. employees under a written plan with consistent terms
- Officers, directors, and the top 1% of earners are excluded from making a Section 83(i) election
- The company must have been privately held before the triggering event, it cannot already be publicly traded
- The stock received must be from a corporation, and partnership interests or LLC units do not qualify
How the Mechanics Work
- You must make the election within 30 days of the RSU settlement date, there is no extension or late filing option
- The company must provide you with a written notice explaining your right to make the election at the time of settlement
- Deferred income becomes taxable at the earliest of five years, a stock sale, or separation from the company
- Social Security and Medicare taxes are still due at settlement, only income tax is deferred under 83(i)
Comparison to Regular RSU Taxation
- Normally, RSUs are taxed as ordinary income at the stock price on the vesting or settlement date
- With 83(i), you receive the shares but postpone the income tax hit, potentially for up to five years
- Regular taxation provides certainty, you know exactly what you owe and your cost basis is set at vesting
- The 83(i) election adds uncertainty: the tax is based on settlement value but paid later
Risks of Making the Election
- If the stock declines after settlement, you still owe tax based on the higher settlement-date value
- You cannot claim a capital loss to offset the income tax, the tax is fixed at the settlement date fair market value
- Leaving the company triggers immediate recognition of the deferred income and a potential large tax bill
- Very few companies meet the 80% coverage requirement, making the election rarely available
Limitations and Gotchas
- You can only make the election once per company, it is a one-time decision at the time of the triggering event
- The election applies to the entire RSU settlement, you cannot defer tax on some shares and pay immediately on others
- State tax treatment varies and some states may not conform to the federal 83(i) deferral rules
- Interest or penalties may apply if estimated tax payments are not handled correctly during the deferral period
When to Consider Section 83(i)
- Consider it if you are a non-executive employee at a company going public that meets the 80% equity coverage requirement
- It may help if you expect to be in a lower tax bracket in a future year when the deferred income is recognized
- Avoid the election if you expect the stock price to drop, since your tax is locked at settlement value
- Consult a tax advisor before the 30-day deadline, once it passes, you cannot go back and make the election
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